A local turbulent kinetic energy (TKE) budget, in which dissipation balances production minus buoyancy flux, and a nonlocal turbulent scalar variance (TSV) budget, in which dissipation balances production minus TSV flux divergence, are tested observationally. The calculations are based on 6 week long records of velocity and sound speed measured between 0.7 and 5.4 m above bottom on the New England shelf. Estimates of fluxes and gradients are direct, while estimates of dissipation rates are indirectly obtained from inertial subrange spectra. Within 2 m of the bottom, buoyancy flux is not an important component of the TKE budget (flux Richardson number Rf0.8 and regression coefficient=0.89¿/¿1.06 and 1.08¿/¿1.05 at 1.65 and 0.74 m above the bottom, respectively). The local TKE budget at 4.35 m above the bed is not closed, however. TSV production and dissipation estimates are strongly correlated at all heights (r2>0.64), but dissipation is systematically greater than production, particularly at 0.74 m above the bed (regression coefficient=2.42¿/¿1.28). Including TSV flux divergence in the balance reduces, statistically significantly, the observed discrepancy. The implications of the results for turbulence closure models and microstructure diffusivity estimates are discussed. ¿ 2001 American Geophysical Union